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CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF BANKS: A STUDY OF LISTED BANKS IN NIGERIA

  • Department: ACCOUNTING
  • Chapters: 1-5
  • Pages: 185
  • Attributes: Primary Data
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ABSTRACT

An international wave of mergers and acquisitions has swept the banking industry as boundaries between financial sectors and products have blurred dramatically. There is therefore the need for countries to have sound resilient banking systems with good corporate governance, which will strengthen and upgrade the institution to survive in an increasingly open environment. In Nigeria, the Central Bank unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to operate in the global market. Despite all its attempts, the Central Bank of Nigeria disclosed that after the consolidation in 2006, 741 cases of attempted fraud and forgery involving N5.4 billion were reported. In the light of the above, this research examined the relationships that exist between governance mechanisms and financial performance in the Nigerian consolidated banks. And also to find out if there is any significant relationship between the level of corporate governance disclosure index among Nigerian banks and their performance. The Pearson Correlation and the regression analysis were used to find out whether there is a relationship between the corporate governance variables and firm’s performance. In examining the level of corporate governance disclosures of the sampled banks, a disclosure index was developed guided by the CBN code of governance and also on the basis of the papers prepared by the UN secretariat for the nineteenth session of ISAR (International Standards of Accounting and Reporting). The study therefore observed that a negative but significant relationship exists between board size, board composition and the financial performance of these banks, while a positive and significant relationship was also noticed between directors’ equity interest, level of governance disclosure and performance. Furthermore, the t- test result indicated that while a significant difference was observed in the profitability of the healthy banks and the rescued banks, no difference was seen in the profitability of banks with foreign directors and that of banks without foreign directors. The study therefore concludes that there is no uniformity in the disclosure of corporate governance practices by the banks. Likewise, the banks do not disclose in general how their debts are performing, by providing a statement that expresses outstanding debts in terms of their ages and due dates. The study suggests that efforts to improve corporate governance should focus on the value of the stock ownership of board members. Also, steps should be taken for mandatory compliance with the code of corporate governance while an effective legal framework should be developed that specifies the rights and obligations of a bank, its directors, shareholders, specific disclosure requirements and provide for effective enforcement of the law.

TABLE OF CONTENT Title Page ………………………………………………………………………………….. i Declaration…………………………………………………………………………………  ii Certification………………………………………………………………………………..  iii Dedication…………………………………………………………………………………. iv Acknowledgements…………………………………………………………………………            v Table of Content…………………………………………………………………………… vi         List of Tables………………………………………………………………………………. vii List of Figures……………………………………………………………………………… viii Appendices………………………………………………………………………………… ix Acronyms and Definitions…………………………………………………………………. x Abstract……………………………………………………………………………………..            xi   CHAPTER ONE: Introduction

1.0           Background to the Study……………………………………………........................ 1

1.1           Statement of Research Problem…………………………………………………….. 6

1.2           Objectives of Study………………………………………………………………….            10

1.3           Research Questions..................................................................................................... 11

1.4           Research Hypotheses...................................................................................................            12

1.5           Significance of the Study…………………………………………………………… 13

1.6           Justification of Study……………………………………………………………….. 14

1.7           Scope and limitation of Study……………………………………………………….            16

1.8           Summary of Research Methodology………………………………………………..  17

1.9           Sources of Data …………………………………………………………………….  18

CHAPTER TWO:  Literature Review and Theoretical Framework

2.0           Introduction    ………………………………………………………………….…… 25

2.1           What is Corporate Governance?..................................................................................            26

2.2           Historical Overview of Corporate Governance …………………………..…………28

2.3           Corporate Governance and Banks…………………………………………………...           30

2.4           Elements of Corporate Governance in Banks ……………………………...………. 34

2.4.1              Regulation and Supervision as Elements of Corporate

               Governance in banks……………………………………………….. 36

2.5      Corporate Governance Mechanisms………………………………..……………….  41

                     2.5.1      Shareholders …………………...…………………………………….42

                     2.5.2      Debt Holders………………………………………………………….43    

2.6      Linkage between Corporate Governance and Firm Performance Practices………..46

2.7      The Role of Internal Corporate Governance Mechanisms in Organisational

           Performance………………………………………………………………………….           48

                     2.7.1      Role of Auditor………………………………………………………          48

                     2.7.2      Role of the Board of Directors……………………………………....           49

                     2.7.3      Role of Chief Executive Officer……………………………………..          50

                     2.7.4      Role of Board Size………………………………………………….. 51

                     2.7.5      Role of CEO Duality………………………..……………………… 52

                     2.7.6      Role of Managers…………………………………………………… 52

2.8      Regulatory Environment for Banks in Nigeria……………………………………… 53

2.9      Governance Standards and Principles around the World……………………………            56

                     2.9.1      United Kingdom……………………………………………………..            56

                     2.9.1.1   The Cadbury Report (1992)………………………………………… 57

                     2.9.1.2   The Greenbury Report (1995)………………………………………. 58        2.9.1.3 The Hampel Report (1998)………………………………………….       58

                     2.9.1.4   The Higgs Report (2003)……………………………………………. 59

                     2.9.1.5   The Combined Code of Corporate Governance (2003)…………….. 60

                     2.9.2      OECD………………………………………………………………..            61

                     2.9.3      Australia…………………………………………………………….. 63

                     2.9.4      United States………………………………………………………....            64

                     2.9.5 Standards and Principles Summary…………………………………..    67

2.10    Corporate Governance and the Current Crisis in Nigerian Banks………………….. 68

2.11 The Current Global Financial Crisis………………………………………………... 70

2.12    Prior Studies on Specific Corporate Governance Practices and Firm-

           Performance………………………………………………………………………….            76

                 2.12.1    Board Composition……….…………………………………………..77

                     2.12.2    Board Size…………………………………………………………….79

                     2.12.3    Shareholder’s Activities…………………………………..………… .83

2.13    The Perspective of Banking Sector Reforms in Nigeria……………..……………..   .89

2.14    State of Corporate Governance in Nigerian Banks…………………………………. .92

2.15The Imperatives of Good Corporate Governance in a Consolidated Nigeria

           Banking System…………………………………………………………………….  96

2.16    Corporate Governance and the Banking System: Lesson from Malaysia………….   104

                     2.16.1    Asian Crisis and Banking Sector Problems…………………………106

                     2.16.2    Evolution and Restructuring of the Malaysian Banking Sector……108

                     2.16.3    Ownership Structure of Banks before and after the Asian Crisis.       108

2.17    Theoretical framework for Corporate Governance…………………………………. 110

                     2.17.1    Stakeholder Theory…………………………………………………...110

                     2.17.2    Stewardship Theory…………………………………………………..112

                     2.17.3    Agency Theory…………………………………………………….    114

                     2.17.4    Agency Relationships in the Context of the Firm…………………..  116

CHAPTER THREE: Research Methods

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